Anderson v. Edward D. Jones & Co., L.P.

• Citation: 990 F.3d 692
• Decision Date: 04 March 2021
• Docket Number: No. 19-17520,19-17520
• Parties: Edward ANDERSON; Coleen Worthington; Janet Goral, Plaintiffs-Appellants, v. EDWARD D. JONES & CO., L.P.; The Jones Financial Companies, LLLP ; EDJ Holding Company, Inc. ; James D. Weddle; Vincent J. Ferrari, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

990 F.3d 692

Edward ANDERSON; Coleen Worthington; Janet Goral, Plaintiffs-Appellants,

v.EDWARD D. JONES & CO., L.P.; The Jones Financial Companies, LLLP ; EDJ Holding Company, Inc. ; James D. Weddle; Vincent J. Ferrari, Defendants-Appellees.

No. 19-17520

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 9, 2020 San Francisco, California

Filed March 4, 2021

Michael Anthony Brown (argued), Spertus Landes & Umhofer LLP, Los Angeles, California; John R. Garner, Garner & Associates, Willows, California; Michael D. Murphy, Franklin D. Azar & Associates P.C., Aurora, Colorado; for Plaintiffs-Appellants.

Mark A. Perry (argued), Gibson Dunn & Crutcher LLP, Washington, D.C.; Alexander K. Mircheff and Meryl L. Young, Gibson Dunn & Crutcher LLP, Los Angeles, California; Samuel A. Keesal Jr., Keesal Young & Logan, Long Beach, California; Julie L. Taylor, Keesal Young & Logan, San Francisco, California; for Defendants-Appellees.

Before: DANNY J. BOGGS,^* MILAN D. SMITH, JR., and MARK J. BENNETT, Circuit Judges.

M. SMITH, Circuit Judge:

Plaintiff-Appellant Edward Anderson and others (collectively, Plaintiffs) are the Lead Plaintiffs in a class action brought against Defendant-Appellee Edward D. Jones & Co., L.P., and other associated entities and individuals (collectively, Edward Jones). Plaintiffs alleged that Edward Jones breached its fiduciary duties owed to Plaintiffs under Missouri and California law. The district court concluded that it did not have subject matter jurisdiction because the Securities Litigation Uniform Standards Act (SLUSA) prevents Plaintiffs from bringing their claims as a class action consisting of fifty or more persons. See 15 U.S.C. § 78bb(f)(1), (f)(5)(B).

Because Edward Jones's alleged misrepresentation or omission that forms the basis for Plaintiffs’ fiduciary duty claims is not "in connection with the purchase or sale of a covered security," id. § 78bb(f)(1)(A), we reverse the decision of the district court and remand for further proceedings consistent with this opinion.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Plaintiffs’ Investment Relationship with Edward Jones

Plaintiffs were investors with Edward Jones, a financial services firm headquartered in St. Louis, Missouri.¹ According to Plaintiffs, they are "buy-and-hold clients," which means that they "conduct[ ] little to no trading each year." Plaintiffs previously invested with Edward Jones through commission-based accounts. Under this investment model, "Edward Jones provided its clients free financial advice, only charging them on a per trade basis." Plaintiffs assert that this "model particularly benefitted middle-income investors in small communities who engaged in little to no trading," like themselves.

In 2008, Edward Jones introduced a fee-based model of investing. In a fee-based account, Edward Jones "charged a flat annual asset management fee." "The standard fee was 1.35% to 1.50% of a client's assets under management," though it could be as high as 2%, in addition to administrative fees. Clients investing in a fee-based account would pay an annual fee "regardless of the transactions" that Edward Jones conducted on behalf of those clients.

Plaintiffs moved their assets from commission-based to fee-based accounts. During the transition, Edward Jones purportedly gave written disclosures to Plaintiffs, including a brochure entitled "Making Good Choices." Clients also signed a form in which they "acknowledge[d] that [the client] has received and read the Brochure, which describes the [fee-based program] in greater detail." Clients also acknowledged that they "made [their] own decision[s] to invest in the" fee-based account. Additionally, clients filled out a form with their investment objectives.

B. Plaintiffs’ Suit Against Edward Jones

Plaintiffs filed their Second Amended Complaint on July 29, 2019, which forms the basis for this appeal. Plaintiffs brought a number of counts against Edward Jones, including allegations that Edward Jones violated its state law fiduciary duties and federal securities law.

Most important to Plaintiffs’ fiduciary duty allegations is that Edward Jones allegedly failed to conduct a "suitability analysis" before inviting Plaintiffs to switch to fee-based accounts. Plaintiffs argue that under Financial Industry Regulatory Authority (FINRA) Rule 2111, "broker-dealers must ensure that fee-based accounts are only recommended to those clients for whom they are suitable; as such accounts tend to be more expensive for clients who engage in little to no trading activity." Plaintiffs concede that FINRA Rule 2111 "may not [create] a private right of action," but argue that a FINRA rule "may be used as evidence of industry standards and practices" when pursuing a breach of fiduciary duty claim.

Additionally, Plaintiffs contend that Edward Jones "improperly incentivize[d] its [financial advisors] to violate their fiduciary duties and rack up asset-based fee revenue for" Edward Jones and "terminated, gave smaller raises and bonuses to, and/or failed to promote [financial advisors] who disagreed with [Edward Jones's] strategy." Plaintiffs allege that Edward Jones pressured financial advisors to switch clients to fee-based accounts through regional meetings, training sessions, and field office visits.

Plaintiffs claim that this lack of a suitability analysis and the corresponding push to move clients to fee-based accounts is a breach of Edward Jones's fiduciary duties under Missouri and California law. According to Plaintiffs, they "should not have been transferred from commission-based accounts into fee-based accounts and, thus, should not have been charged annual asset-based fees at all, only commissions." They seek damages

in the amount of the fees they paid Edward Jones after having their assets improperly transferred from commission-based accounts into unsuitable fee-based accounts, less the commissions they would have paid if the assets ha[d] properly remained in the commission-based accounts, plus the increase in value the assets would have achieved over time had Edward Jones not improperly deducted the substantial fees from the accounts.

Plaintiffs do not allege that they would have made or not made any particular trades had Edward Jones conducted a suitability analysis.

Plaintiffs also alleged that Edward Jones violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and the corresponding Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. In this section of the complaint, Plaintiffs argued that Edward Jones "failed to disclose" the fact that financial advisors "did not conduct a suitability analysis to assess whether a fee-based account was suitable or otherwise in the best interests of clients, prior to transferring the clients from commission-based accounts to fee-based accounts." Plaintiffs claimed that "[t]he commission-based/fee-based dichotomy is critical and material to any investment decision, including Lead Plaintiffs’ and the Class members’ investment decisions to transfer them from commission-based accounts into fee-based accounts." Plaintiffs did not devote a section of the Rule 10b-5 cause of action to showing that there was "a connection between [Edward Jones's] misrepresentation or omission and the purchase or sale of a security." Halliburton Co. v. Erica P. John Fund, Inc. , 573 U.S. 258, 267, 134 S.Ct. 2398, 189 L.Ed.2d 339 (2014).

Referring to the choice of investment advisor, rather than the choice to purchase or sell a security, Plaintiffs alleged:

[I]f [Edward Jones] disclosed to Lead Plaintiffs that Edward Jones was not fulfilling even its most basic responsibilities as an investment advisor—namely, conducting a suitability analysis—Lead Plaintiffs’ trust in the relationship would have faltered and a reasonable investor would have looked elsewhere for investment advisory services or chosen not to heed their [financial advisor's] advice.

The district court dismissed the complaint with prejudice. In re Edward D. Jones & Co., L.P. Sec. Litig. , No. 2:18-CV-00714-JAM-AC, 2019 WL 5887209, at *8 (E.D. Cal. Nov. 12, 2019). The district court characterized Plaintiffs’ fiduciary duty causes of action as alleging a misrepresentation or omission based on Edward Jones not conducting a suitability analysis. Id. at *2. The district court reasoned that Plaintiffs could not plead a state law fiduciary duty claim and a federal securities claim based on the same conduct when Plaintiffs characterized the lack of a suitability analysis as an omission for the federal law claim, but not an omission for the state law claim. Id. Thus, in accordance with the previous dismissal,² the district court held, pursuant to SLUSA, that it had no jurisdiction over the class action state law claim. See id. The court did not address whether the lack of a suitability analysis was "in connection with the purchase or sale of a covered security" for the fiduciary duty claims.³ 15 U.S.C. § 78bb(f)(1)(A).

The district court also held that the Rule 10b-5 claim failed for a number of reasons. Relevant here, the district court decided that the alleged lack of suitability analysis was not an actionable omission because Edward Jones provided Plaintiffs with various documents relating to the nature of the fee-based accounts. See In re Edward D. Jones , 2019 WL 5887209, at *4–5. The district court also stated that these various documents "were part of the suitability analysis [Edward Jones] conducted, further undermining Plaintiffs’ allegations that [Edward Jones] did not conduct a suitability analysis." Id. at *5 (internal quotation marks and citation omitted). The district court additionally addressed scienter, reliance, and loss causation. See id. at *5–7. However, the district court did not decide whether Plaintiffs’ Rule 10b-5 claim alleged "a connection between" the lack of a suitability analysis "and the purchase or sale of a security." Halliburton , 573 U.S. at 267, 134 S.Ct. 2398.

Plaintiff...